Alpha - September 2007 - (Page 46)

FX Electronic Trading in the Foreign Exchange Market MiFID [the Markets in Financial Instruments Directive]. MODERATOR: How will that be implemented when it comes class, many aren’t. If you’re following a statistical arbitrage strategy, you may not be trading foreign exchanges and asset class, and those people may not even want anonymity. There are plenty of people out there that say: “I want my counterparty to know who I am.” And that goes across the players in the market. LAURENT DEVELAY, Fortis Investments: As a real money player, we want the banks that we’re trading with to know who we are and that we’re asking a price in that kind of currency. This is the area that has the biggest potential to develop right now, because the real money side is not as integrated as a hedge from the industry for the moment. The hedge fund is at the top of the business, there’s no question of that. They’re the biggest liquidity providers. Most development is going to come from real money, and there are not that many players that are completely integrated right now. LOWRY: Every part of this market is growing. Is growth all going to come from real money managers or hedge funds? You know, when you see a three-person shop turning over $300 million a day in by November? How does the directive define best price and best execution? WARMS: We researched MiFID and its implications for the FX market. What we learned is that MiFID requires each institution to develop their own policies and definitions for best execution. It is our understanding that as long as the institution can demonstrate that it has followed its established best execution policy, then it will be meeting MiFID requirements. DEVELAY: Our definition of MiFID, when you’re using a multi- bank platform, is to pick the best price from the five quotes you have asked for. And then to advise your clients that you have been picking the best price. ROBSON: I like that definition, but there isn’t one answer to this. There’ll be a lot of interpretation and different customers will have a fiduciary responsibility, others will have much more scope for interpretation around what’s best execution or best price. From an FXMarketSpace point of view, we take the exchange view of the world on this and start with a model that means you’re guaranteed, no matter who you are or where you are, to trade on the best bid or best offer. DEVELAY: If anonymity is meeting wide spreads, that’s not so attractive. CONTE: Taking a step back, all of us are alluding to From left to right: Mark Robson, FXMarketSpace; and Jeremy Smart, Morgan Stanley in foreign exchange volume, there’s a lot of growth there. The most explosive growth I think will come, in percentage terms, from the retail market. But will that be as large a portion of the market as hedge funds are or corporates or the real money space? I’m more skeptical here. SMART: I do believe as transaction costs have come down, that a lot of strategies which were once unprofitable are now profitable and can be traded. General access to data, computing power and so on just make strategy generation for pure speculative gain much easier to do. One of the reasons why I think that the real money space isn’t so highly evolved from an electronic standpoint is that we don’t get, from a sell-side point of view, a clear message from all of the participants how they would like it to develop. We try to take a straw poll of real money managers from time to time, to figure out where we should go from a product standpoint, but it’s difficult because we get a lot of varied answers. It can be difficult to focus investment. That said, one of the big drivers on the buy-side will be 4 • Alpha Sponsored Roundtable • September 2007 components of the execution workflow while building some continuity to this process. As stated previously, “Best Execution” practices will be defined differently by clients based on interpretations of what they reasonably decide represents “Best EX” policies. Therefore, one might feel comfortable meeting such obligations by seeking out three sets of prices over portal while others might believe executing over aggregated marketplace fulfills need to seek out best price. No matter how clients choose to define such measures our job as technology providers is to help shape products which integrate client’s transactional workflow requirements offering comfort that they are complying with both internal and market practices. One’s technology must be flexible enough to evolve with market and client dynamics as they continue to refine variables which influence their overall business needs. ROBSON: None of us is going to say that there’s one monolithic definition of best execution or best price. It’s all about what different types of customers need, and by and large, they understand what they want. They won’t go for a theoretical best model if it doesn’t deliver the right execution results. MODERATOR: Algorithmic trading is still very young to the market. How do you see that maturing?

Table of Contents Feed for the Digital Edition of Alpha - September 2007

Contents Letter from the Editor Longs & Shorts Pension Corner: Keeping the Faith The Good Guys: Going Public Interview: Barry Bausano - A Delicate Balance Cover Story: Cruel, Cruel Summer Profile: Phil Cooper - Alternative Flight Plan Strategies: Marshall Wace - TOPS in Its Field Profile: Fortis Investments - Banking on Alternatives Research Center: Top Equity Trading Firms Alpha Bytes: Desktop Duel Unhedged: Commentary - The Taxman Cometh

Alpha - September 2007

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